Economic and Financial Conditions Bode Well for U.S. Agriculture

Economic and Financial Conditions Bode Well for U.S. Agriculture

Article excerpt

U.S. Agriculture Entered the Recession Fundamentally Sound

Bolstered by strong demand from developing countries, the falling dollar, and the growing importance of biofuels, U.S. agriculture enjoyed several years of high prices and strong demand prior to the 2008-09 recession. The same factors helped maintain high agricultural prices throughout the recession. Agriculture's relatively strong balance sheets and low overall use of debt entering and exiting the recession provide a financial base for future growth.

Because of strong demand for agricultural commodities and products, real U.S. farm income has been robust since 2004. This period of growth enabled farmers to improve their overall liquidity and strengthen their balance sheets. Gains in farm income also increased farmland values by raising expectations of future income flows. Inexpensive and accessible credit lowered the cost of financing farmland purchases and contributed to the surge in farmland values. As a result, farm financial assets grew by 31 percent and farm equity by 32 percent between 2004 and 2012.

Farm income dipped slightly in 2009 for most farm businesses. However, farmers were cushioned by good liquidity and low debt levels. The combination of rising farm income and land values, along with the likelihood of continued low interest rates over the near term, points toward farm business stability over the next few years.

Due to continued growth in farm earnings, farmland lost far less value during the recession than commercial and residential real estate. Some concerns arose that volatility in urban real estate markets over the last decade would spül over into markets for farmland, since farmland near urban areas derives value from its development potential. Findings from a recent ERS study of farmland values and ownership suggest otherwise. During the housing market downturn (2007-09) that affected all but the Plains and Delta regions, farmland values generally declined by less than rural housing values. And during the "boom" years of the U.S. housing market (2001-06), farmland values grew faster than rural housing values in many States.

Farmers Limit Credit Use

U.S. farmers, by being cautious with debt financing, have generally avoided the problems in other sectors that are heavily reliant on debt. The debt-to-asset ratio for farm businesses has trended lower since the mid-1980s and is far lower than the ratios of corporate and noncorporate nonfarm businesses. Low debt use-as reflected in the debt-to-asset ratio and the interest coverage ratio-reduces both variability in net income and incentives for excessive risk taking. A high percentage of assets financed through debt indicates greater leverage and more financial risk. Overusing leverage leaves farms at risk, since the cost of financing this borrowing (interest payments) can outweigh the return provided by the expansion. Lower use of debt leverage by farms indicates fewer potential conflicts between lenders and farm business owners over risk and asset choices.

Interest coverage ratios, which are calculated by dividing a company's earnings before interest and taxes by the interest expenses, show a similar picture of relatively low debt burdens for farmers. Since 1990, interest coverage ratios for farm businesses have exceeded those of nonfarm, noncorporate businesses and corporate businesses. The relatively low debt use by agriculture reflects the conservative nature of farmers and their primary lenders, which has reduced the sensitivity of agricultural returns and equity to fluctuations in the general business cycle.

Within the farm sector, the use of debt leverageand thus exposure to liquidity problems- tends to be higher for larger farms, livestock producers, and younger farmers. However, farm delinquency and default rates are expected to be stable in 2012-13; interest rates are expected to remain low for highly qualified farm borrowers; and farm commodity prices are expected to remain relatively strong. …